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This chapter provides an introduction to the history, uses, methods, strengths, and limits of law and economics. It begins by examining the role of positive and normative approaches to law and economics. To examine the positivist thesis - that the law does in fact tend toward efficiency - the chapter discussed and analyzes the famous Hand Formula developed by Judge Learned Hand in United States v. Carroll Towing. As one of the only traditional cases in which a judge arguably made efficiency his explicit goal, the case presents an excellent opportunity to assess whether, even an efficiency-oriented judge will or can identify the efficient result. The chapter reviews the possible liability rules that might have been applied in Carroll Towing, and uses that review to introduce many of the core concepts and methods of law and economics, including game theory. Ultimately, the chapter concludes that, although the Hand Formula may have led to one of the possible efficient results, there is little reason to be confident, and some reason to doubt, that Judge Hand reached the most efficient outcome. The difficulties inherent in selecting the efficient rule through litigation present a significant challenge to the positivist case for legal economics.

The second part of the chapter considers both the normative support for efficiency and the range of challenges to, and refinements of, the normative position that have developed in recent years. The chapter highlights some of the trade-offs inherent in the law and economics approach and concludes that law and economics has, like any legal theory, both costs and benefits.

Date posted: December 31, 2009
; Last revised: February 13, 2010

Suggested Citation

Hanson, Jon D. and Hanson, Kathleen and Hart, Melissa, Law and Economics. A COMPANION TO PHILOSOPHY OF LAW AND LEGAL THEORY, Dennis Patterson, ed., 2010; U of Colorado Law Legal Studies Research Paper No. 1529806; Harvard Public Law Working Paper No. 10-14. Available at SSRN: http://ssrn.com/abstract=1529806